Shares of the non-banking financial companies (NBFCs) have been hammered in the last few sessions on growing fears of liquidity crunch in the sector.
As many as 39 stocks in the non-banking financial space have fallen by up to 53 percent in September, including the likes of Dewan Housing Finance ltd (down 53 percent), Reliance Capital (down by over 32 percent), L&T Finance (lower by over 29 percent), Indiabulls Housing Finance (dipping by 26.5 percent).
So what triggered the massive stock fall in the NBFCs?
It all started when a DSP Mutual Funds reportedly sold a large quantum of commercial papers of DHFL at a steep discount, triggering fears of a liquidity crunch based on the rumour that DHFL may have defaulted on one of its debt payments.
Dewan Housing Finance Limited (DHFL) shares tanked more than 50 percent due to panic-selling to hit its lowest levels in 19 months and traded at Rs 274.75 per share on Friday.
Soon after, not only DHFL, but other NBFCs saw a sharp fall in the market on Friday. Indiabulls Housing Finance, M&M Finance and Bajaj Finance plunged more than 24 percent, 9.5 percent and 7.53 percent, respectively.
After crash comes the clarifications
The fund house later clarified about the details of the transaction.
Hemendra Kothari, chairman of DSP Mutual Funds, in an interview to CNBC-TV18 said, "In our liquid fund, we have all AAA or A+ 100 percent of our securities. We have no problem of liquidity whatsoever of any kind. We are trying to keep our maturity profile low, because interest rates are going up. Interest rates going up and we would like to come down in our maturity period as such and we have been doing it for the last six months. It's no today that we have done it."
The fund house, in a press statement, said it 'sold securities across issuers in the last few months' for various reasons.
DHFL on Monday clarified that the company had neither defaulted on any payment nor had it delayed meeting any payment obligations. By then, the company had already lost 50 percent in trade after a heavy selling session on Friday.
When DHFL released its clarification on Monday, the shares of the company rose 25 percent but again dropped to more than 19 percent
on Tuesday. Concerns around liquidity, yields
One of the speculation around the large deal between DSP Mutual Funds and DHFL is that the fund house may be in a soup due to its large deals with the troubled IL&FS-owned NBFC, IL&FS Financial Services.
The higher yield sale, which caused the investors to think that there may be liquidity crunch in the sector, can also be due to the fact that the fund house was in a dire need of money.
DSP Mutual Funds' overall exposure to IL&FS and its group companies is Rs 629 crore as of August 31, according to a report by
With an amount as large as Rs 629 crore, it is possible that the fund house wanted to brace its liquidity position if at all it faces redemption pressure in the near future.
Another factor that may have worried investors is that DHFL, one of the most trusted commercial paper issuers in the market, could not immediately find takers at a yield as high as 11 percent.
Over the past week, IL&FS saw sharp cut in ratings after a
series of defaults and weakening of the company’s liquidity profile.
The company, in an exchange filing on Tuesday, filed an application with the
National Company Law Tribunal (NCLT) seeking 'certain reliefs'.
IL&FS defaulted for the first time on inter-corporate deposits and commercial papers (borrowings) worth Rs 450 crore in June. Then again in September, it defaulted on a short-term loan of Rs 1,000 crore from Sidbi (Small Industries Development Bank of India).
The IL&FS-run NBFC has
also reportedly been asked by the Reserve Bank of India to reduce debt exposure in all its parent group entities by March 2019. 'Don't rush into NBFCs just because valuations have become attractive' Ashish Gupta, India head of research of Credit Suisse, said on Monday that the concerns that the current liquidity situation will lead to distress in non-banking financial companies (NBFCs) are exaggerated.
"What the market is recalibrating to is the fact that they were perhaps too optimistic on how large the entirely wholesale funded model could grow to ... I believe that the overall liquidity situation at NBFC is still fairly manageable."
Andrew Holland, CEO of Avendus Capital Alternate Strategies, said the issues in the financials are much worse than they think.
Don't rush into NBFCs just because valuations have become attractive, he said, adding that, "we would look at quality NBFCs but the valuations there were still high and would need to come off a bit more."
Ajay Srivastava, CEO of Dimensions Corporate Finance, on Monday said India is no longer a preferred market to invest as the market continued Friday's sell-off, taking the Nifty below 11,000.
“Investors have already spoken with their cheque books, we have not seen major inflows coming in, internationally India is not in the top five list of investing locations at this point of time, no mutual fund manager is overweight on India, this is not the flavour of the market, this is not what is going to work in the next 12 months,"
said Srivastava. Government tries to soothe investors
Finance Minister on Monday said the
government will take all measures to ensure that adequate liquidity is maintained/provided to the NBFCs.
On Sunday, the Reserve Bank of India and the markets regulator Securities and Exchange Board of India said that they are
closely monitoring developments in financial markets and are ready to take appropriate steps if needed, a central bank statement said.